Some people have likened outsourcing to nuclear power, it can be used for good or evil, and unfortunately, it comes with a reputation to match. In the outsourcing of Facilities Management, all developmental roads lead back to the UK where the growth in outsourcing was predominantly driven by the public sector with the private sector being slow to take up the trend. In South Africa the opposite is true due in the main to the influence of organised labour, its hold over what is somewhat ironically the only democratically elected Communist Government in the world and their collective paranoia regarding what they see as the hidden agenda of outsourcing and the perception of its infringement of workers rights. This has hit a high note recently with the #outsourcingmustfall movement.
In Europe, outsourced jobs have been protected under Transfer of Undertakings (Protection of Employment) Regulations, otherwise known as TUPE since it was first introduced in 1981. As with so much of our legislation this was replicated, tightened up and enforced via section 197 of the Labour Relations Act (No. 66 of 1995). What this effectively means is that workers right are protected when they are outsourced to the supplier. I fully applaud the protection of the workers rights but as with a number of pieces of well-meaning legislation this is abused by both Clients and Suppliers alike, and it is this that has lead to the fatal flaw in the way that outsourcing is currently approached and the alienation of the current workforce and its social allies.
Despite all of these issues outsourcing done well is still compelling for the following reasons;
1. Labour cost reduction
Clearly, no organisation wants to increase its operational costs and so with labour being such a large part of non-core expenditure, the ability to reduce the overall effect of labour cost is seen as a key issue. This is achievable despite the shackles of section 197/TUPE due primarily because we as the outsourced provider see this work as core and can produce the same results at lower overall labour costs because we invest more in productivity improvements than our clients did when this was non-core in their organisations.
In addition to this, we are able to amortise such investments across multiple client engagements, thereby giving a better overall return on capital employed (ROCE).
Because the tasks we undertake as outsourced entities are core to our business, we also invest more in our people allowing us both to recruit superior talent who see FM as their chosen profession as well as providing development and career paths for those transferred individuals that they would never have been exposed to as non-core employees. A more highly trained, motivated, efficient and effective workforce can produce immediate and impressive results.
At the same time, by asking outsourcers to compete with one another, the client organisation can drive down the effective cost of labour overtime in ways that could never be negotiated with an in-house workforce.
Finally, outsourcing frees the client from the cost of all the non-core work entailed in managing the non-core workers involved.
2. Improved returns on invested capital
This is a key metric for investors who wish to optimise the allocation of capital to achieve the highest risk-adjusted returns they can. They want their capital to go into core business not non-core because it is only through improved competitive performance in the future that they can be rewarded.
Outsourcing has a double whammy effect; in the company where the work is non-core, it frees up capital so that it can be repurposed for core business; meanwhile, in the company to which the work is going, the same work is defined as core, and investment will contribute to increased returns. This is the economic magic of outsourcing, that one company’s non-core can be another company’s core, and by transferring the work from one to the other, both companies and investors come out ahead.
3. Minimisation of fixed cost
Outsourcing allows companies to transform a fixed cost into a variable cost. Even where a company pays a modest premium over the in-house cost of performing the same task, outsourcing can buffer companies against the cyclical nature of their business sector.
That is with a variable resource pool to draw upon one can staff up in good times and downsize in bad times without having to bear the cost and pain of the hiring/firing cycle in-house. This not only avoids the direct expense of recruiting fees and severance packages but also the emotional exhaustion that sucks much-needed energy away from competitive performance.
At this point, it is worth noting that this is where a lot of time and effort is spent in negotiating an outsourcing deal and frankly one that is a major bone of contention. There are fundamentally 7 levers which we as an outsourced provider use to drive down the cost to our Clients. I will elaborate on all of these in another article. However the first of those levers is the centralisation of the costs and it is not until all of the costs are in one bucket that a true understanding of both the direct and indirect costs that are inherent in the management of non-core are fully understood.
It is a diplomatic nightmare to try and pick a way through the minefield of advising a Client that they do not necessarily fully understand and account for their non-core and all associated costs. All we can suggest at this juncture is that cost comparisons between in-house and outsourced be scrutinised very closely as in-house teams often underestimate the full extent of the costs associated with non-core.
4. Absorption of risk
The fourth benefit of outsourcing is that companies can transfer responsibility for risk to the outsourcer making it their responsibility to ensure against failure and failing that, insure for the liability. Low probability/high consequence outcomes, such as data centre failures or security violations, force companies to encumber significant resources at considerable expense. Whilst outsourcers must pay this tax just like anyone else, we can amortise this across multiple clients, thereby eliminating redundant capital expenditure for the outsourcer.
5. Reduction in internal mass
The more non-core work a company keeps in-house, the more risk averse a management agenda it must embrace. Risk aversion is both non-value adding and a distraction which attracts a disproportionate amount of resources. By releasing its workforce from non-core work, Clients can offload huge chunks of internal mass and resources.
6. Focus on core
With the ubiquitous nature of change the scarcest resources are time, talent and management attention. Non-core processes unduly tax all three. Until the process is completely off your books, management must continually balance the interests of the non-core teams with those of core. Outsourcing frees everyone’s calendar to focus on core business.
For all of these reasons, it is critical to drive as much non-core work as possible out of the enterprise completely. Outsourcing is the ultimate tool for extracting resources from non-value adding non-core business and is thus a key enabler of radical productivity.